Note 7 – Subordinated Convertible Debt with Related Parties

On March 28, 2016 the Company and its wholly-owned subsidiary, R.L. Drake Holdings, LLC (“RLD”), as borrowers and Robert J. Pallé, as agent (in such capacity “Agent”) and as a lender, together with Carol M. Pallé, Steven Shea and James H. Williams as lenders (collectively, the “Subordinated Lenders”) entered into a certain Amended and Restated Senior Subordinated Convertible Loan and Security Agreement (the “Subordinated Loan Agreement”), pursuant to which the Subordinated Lenders agreed to provide the Company with a delayed draw term loan facility of up to $750 (“Subordinated Loan Facility”), under which individual advances in amounts not less than $50 may be drawn by the Company. Interest on the outstanding balance under the Subordinated Loan Facility from time to time, accrues at 12% per annum (subject to increase under certain circumstances) and is payable monthly in-kind by the automatic increase of the principal amount of the loan on each monthly interest payment date, by the amount of the accrued interest payable at that time (“PIK Interest”); provided, however, that at the option of the Company, it may pay interest in cash on any interest payment date, in lieu of PIK Interest. The Subordinated Lenders have the option of converting the principal balance of the loan, in whole (unless otherwise agreed by the Company), into shares of the Company’s common stock at a conversion price of $0.54 per share (subject to adjustment under certain circumstances). This conversion right is subject to stockholder approval as required by the rules of the NYSE MKT, which approval was obtained on May 24, 2016 at the Company’s 2016 annual meeting of stockholders. The obligations of the Company and RLD under the Subordinated Loan Agreement are secured by substantially all of the Company’s and RLD’s assets, including by a mortgage against the Old Bridge Property (the “Subordinated Mortgage”). The Subordinated Loan Agreement terminates three years from the date of closing, at which time the accreted principal balance of the loan (by virtue of the PIK Interest) plus any other accrued unpaid interest, will be due and payable in full.

In connection with the Subordinated Loan Agreement, the Company, RLD, the Subordinated Lenders and Santander entered into an Amended and Restated Subordination Agreement (the “Subordination Agreement”), pursuant to which the rights of the Subordinated Lenders under the Subordinated Loan Agreement and the Subordinated Mortgage are subordinate to the rights of Santander under the Santander Loan Agreement and related security documents. The Subordination Agreement precludes the Company from making cash payments of interest in lieu of PIK Interest, in the absence of the prior written consent of Santander.

As of June 30, 2016, the Subordinated Lenders have advanced $500 to the Company. In addition, $15 and $21 of PIK interest has been accrued in the three and six month months ended June 30, 2016, respectively. The Company evaluated the conversion option embedded in the its Subordinated Loan Agreement issued in June 2016 in accordance with the provisions of ASC 815 and determined that the conversion option has all of the characteristics of a derivative in its entirety and does not qualify for an exception to the derivative accounting rules. Specifically, the exercise price of the conversion option entitles the Subordinated Lenders to an adjustment of the exercise price in the event that the Company subsequently issues equity securities or equity linked securities at prices more favorable than the exercise price of the conversion option embedded in the Subordinated Loan Agreement. Accordingly, the conversion option is not indexed to the Company’s own stock. Due to the derivative treatment of the conversion option, the Company recorded a $249 and $177 derivative liability as a debt discount at June 30, 2016 and March 31, 2016, respectively. The Company computed the fair value of the derivative liability at the date of issuance and the reporting date using a binomial lattice model with the following assumptions: stock price of $0.48 and $0.38, conversion price of $0.54 and $0.54, volatility of 93% and 91%, expected term of 2.75 years and 3 years, risk free rate of 0.71% and 0.87% and dividend yield 0% and 0% at June 30, 2016 and March 31, 2016, respectively. The change in the fair value of the derivative liability and accretion of the debt discount was $72 in the three months ended June 30, 2016.

The Subordinated Loan Agreement amended and restated a prior agreement entered into on February 11, 2016 between the Company and RLD, as borrowers and Robert J. Pallé and Carol M. Pallé, as lenders (the “Prior Subordinated Loan Agreement”), pursuant to which Mr. and Mrs. Pallé had agreed to provide the Company with a delayed draw term loan facility of up to $600 on terms substantially similar to those terms set forth in the Subordinated Loan Agreement, including the conversion rights and pledge of Company assets to secure the loan. Aggregate advances under the Prior Subordinated Loan Agreement were $300 and such balances have transferred over to and now constitute outstanding balances under the Subordinated Loan Agreement. The Prior Subordinated Loan Agreement was amended and restated by the Subordinated Loan Agreement in order to increase the amount available for borrowing by the Company in an effort to further enhance the Company’s capital resources and liquidity.